2/23/2007 @ 9:00PM

The UnCarly

How Mark Hurd, the consummate corporate coach, parlayed a fixation on efficiency into a world-beating revival at Hewlett-Packard. Now if only that spying scandal would go away

In the aftermath of the embarrassing corporate spying scandal that wracked
Hewlett-Packard Co.
with a wave of investigations, resignations, a lawsuit and a few indictments, Chief Executive Mark Hurd has managed to turn humiliation into vindication. As 2006 ended, HP emerged as the largest tech company in the world, bringing in $92 billion in sales and eclipsing
IBM
, which had held the number one spot for four decades.

The milestone marks a coming-out party of sorts for the assiduously low-profile Hurd, a largely unsung
NCR
Corp. lifer who joined Hewlett-Packard 23 months ago, after the sudden ouster of star chief executive Carleton S. Fiorina. It buoys his credibility inside the company (and on Wall Street) just as he sets plans to take HP beyond the $100 billion mark by using HP’s own overhaul as a selling tool for its consulting clients. It’s going to sell a cheaper, simpler, better overhaul to corporate America’s biggest tech customers.

Growth is his obsession, and for HP to keep pace with the tech industry, it must add revenue of $6 billion every year–an incremental chunk that is as large as NCR itself, the only company Hurd ever had run, or worked for, before arriving at HP.

And that, pretty much, is as close to a Grand Vision as Mark Hurd is willing to get. In sharp and studied contrast to his predecessor, Hurd has cultivated an image as the UnCarly, arriving without bold proclamations or sweeping plans. He pored over the books, interrogated the senior staff he inherited and then set out to fix the parts that Fiorina had gotten wrong. “Without execution,” he intones, “vision is just another word for hallucination.” He adds: “The day you feel like you’ve won, you need to drive out of the parking lot and not come back.”

Those bromides sound more fitting coming from a coach, and in many ways Hurd is like a corporate coach. His conversations take in senior lieutenants and factory-floor managers alike. He leaves 50 voice mails a day and grabs quick updates by cell phone as he marches from one meeting to the next. He focuses on process and execution, slogging through minute details to get to a clear answer and pressing relentlessly to squeeze out more cost and stir more demand.

“Year on year more money sticks to our fingers,”
Coach
Hurd tells his players. It is mundane stuff–yet it has let HP double its stock price in 23 months. Its net income is up 158% since Hurd’s arrival to $6 billion for the fiscal year that ended Oct. 31. That came to $41,320 per employee, compared with $28,840 for IBM. HP’s revenue per worker, $611,050, is twice as high as IBM’s.

Carly Fiorina, by contrast, was more of a quarterback than a coach. In five and a half years at HP she shook up the company’s calcified and self-satisfied style of business, known as “the HP Way,” and replaced complacency with urgency. Commingling leadership and showmanship, she espoused a Grand Vision of the digital future, put herself and her voice-over in a new ad blitz and graced the lobby with her own portrait. In 2001 she engineered the $19 billion takeover of Compaq, a deal so controversial that an HP board member–Walter Hewlett, the elderly scion of HP cofounder William Hewlett–voted for it and then campaigned publicly against it.

And then she was gone, blindsided by a board revolt when her Compaq deal fell short and her vision failed to lift the stock price (albeit amid the worst and longest slump in tech industry history). Fiorina had many of the right ideas, and her call to the HP faithful was particularly prescient, warning of the dire threat posed by the Internet, commoditization and nascent offshore rivals. She faltered in execution and in charming Wall Street; in her five and a half years at HP the stock fell 56%.

Fiorina was fired on Feb. 9, 2005. On Apr. 1 Hurd arrived at HP and went underground: no ad cameos or voice-overs, no portrait in the lobby, no lengthy press profiles (until this one). Fiorina would schmooze with world leaders and business titans at the annual World Economic Forum in Davos, Switzerland; Hurd skipped Davos in January, but a few weeks earlier he spent a day working the floor at a
Best Buy
near HP’s base in Palo Alto, Calif., to hear how customers viewed his products.

Upon occupying Fiorina’s old office, Hurd soon realized he had taken charge of a demoralized staff contending with organizational chaos and bloated costs. Days later he began a battery of briefings from dozens of managers, intent on learning the business. Quickly they knew to keep their pitches to two slides: What does my group do inside HP? Where can we find growth? Hurd, meanwhile, memorized hundreds of metrics–prices, costs, margins, discounts, growth rates, revenue, profits–and invoked them in follow-up sessions, subtly showing off and letting them all know: I was listening, and I will hold you to what you told me.

Mark Hurd was born in New York, raised in Florida and attended Baylor University in Waco, Tex. on a tennis scholarship, rising to team captain. He graduated with a bachelor’s degree in business in 1979. He briefly tried the pro tennis circuit but disliked it. “In the pros, tennis is all about individuals,” Hurd says. “In college it’s getting individuals to make points for the team.”

Hurd can push this collegial thing a bit far: His face isn’t on the cover of this issue of FORBES because he refused to pose solo. He insisted he be flanked by members of “my team” and exacted a promise that we wouldn’t crop them out. It shows a striking difference from the Cult of Carly era–and that likely is the point, every bit as premeditated and stage-managed as Fiorina herself would have done it.

He joined NCR in 1980 as a salesman in San Antonio. Over time he ran everything from district sales to global marketing to overseeing all operations, even as NCR got bought by the old
AT&T
in 1991 and then got spun out again in 1997. NCR moved out of the hardware business to emphasize software consulting, and in 1999 Hurd took charge of Teradata, a fast-growing data-warehousing business. The Teradata job schooled him in the importance of fast, accurate figures on every part of a company’s performance, which let him forecast from recent sales the likely fate of every product and make quick adjustments.

Hurd became chief executive of NCR in 2003, by which time its stock had sunk from $27 in April 1999 to a death-rattle range of $9. He used cost-cutting, layoffs and growth at Teradata to quadruple NCR’s stock price (to a still lowly $39) before taking the HP job–a glamorous post for which he hadn’t expected to be considered.

As Hurd began his get-acquainted briefings two years ago, he displayed an unerring willingness to bore in and ask the same question over and over again until he could grasp a clear answer. “He is a different CEO for a different time,” says Ann Livermore, the 25-year HP veteran who runs the servers, software and services division. “He drives operational excellence. He believes in business basics, a focus on cost reduction, so that we can price to win.”

HP’s multibillion-dollar scale haunts Hurd, for even minor inefficiencies can cost the company billions of dollars. HP lifted its profit margin (before interest and taxes) by 1.6 percentage points in fiscal 2006, to 8%. But Hurd notes that HP has costs of $84 billion–if it runs at 90% efficiency, he says, HP wastes $8.4 billion. Even at 98% the waste costs $1.7 billion. It is a visceral ache for him.

Three months into his new job Hurd visited the main site, in San Diego, of the printer division, whose $27 billion in revenue accounts for 29% of the total. He huddled in a conference room with a dozen managers who briefed him on their separate businesses, from consumer scanners to car-size commercial monsters able to print a bound book in three minutes.

“The whole staff is there, the lights are on and it’s just you and Mark,” says Steven Nigro, a senior vice president. “Everyone else is sitting around you, grateful they aren’t in the spotlight.” Hurd looked at Nigro’s forecast for 2006 revenues, operating expenses and marketing and began his slow, steady questioning–if we added a bit more sales growth, how would that show up in margins? Where does the sales staff need more bodies?

“If you can’t explain this better than I can,” he told Nigro at one point, “come back in two months and tell me then what’s going on.” When they met again as planned, Hurd recalled every number Nigro had told him, without resorting to notes. News of such meetings flooded management, and the message was clear: You must understand how the revenue moves through your business and how your business fits into HP.

Hurd soon learned that some of HP’s most powerful execs had controlled only 30% of their budgets. Under Fiorina HP rested on three pillars known as the product divisions (printers, pcs, servers). These units were responsible for designing and building their wares–but most marketing and selling were run by a separate outfit: the Customer Solutions Group. Fiorina had formed CSG to unite (or neutralize) the autonomous product-line fiefs that the old HP had always tolerated. (This resulted in a mishmash of 80 brands under the HP shingle; Fiorina whittled it down to HP and Compaq. Hurd has kept it like that.) For enterprise sales, “We thought we’d pull it all into one brand,” Livermore says.

Instead, the new structure blocked direct feedback from the sales force to product designers. It pitted divisions against one another in pushing CSG to devote more sales staff to selling one unit’s wares over another’s. And the setup let each side avoid accountability and blame: If a new printer flopped, was it because of bad design in the printer division–or because CSG had done a poor job in selling it? When Hurd arrived he phased out CSG and by July 2005 had junked the group entirely.

He handed budget control to the product division heads, with only centralized costs like human resources and finance out of their hands. “Now I have 80% control of my P&L. Sales, marketing and supply are all under my control,” Livermore says. Todd Bradley, head of HP’s PC division, adds: “It’s a no-place-to-hide model. Accountability is a big part of the strategy.”

At the same time, Hurd imposed layoffs of 15,300 people with no loss of revenues; most of the jobs were trimmed from those centralized positions in personnel, finance and the in-house tech staff. The watchword: simplify. Fiorina had a complex bonus system built around revenue, profitability and subjective evaluations like “total customer experience.” Hurd’s plan bases bonuses solely on the company’s profitability and revenue growth. Likewise, Fiorina had paired the PC biz with printers, but Hurd split the two lines. And Fiorina had combined HP’s mission-critical tech operation with a global operations group that oversaw $50 billion in spending on everything from ballpoint pens and office furniture to offshore vendor contracts and LCD panels for new notebook computers; Hurd split them. Thereafter he chopped up the procurement group so that each product division controlled its own supply lines.

The HP folks also showed a maniacal obsession with tracking every detail of the thousands of products moving off factory lines each day. HP sells 8,200 big servers and ten times that many PCs a day. Two printers go out every second somewhere in the 179 countries where HP’s 150,000 employees do business. The company’s newly erected in-house system can track every piece of HP hardware and project its sales potential, from a printer cartridge to a massively parallel supercomputer, from a factory in Thailand to a store shelf in Biloxi, Miss.

HP hopes to use its powerful network as a case study to help its salespeople talk their biggest corporate accounts into signing up for the same thing. HP’s own overhaul began three months into Hurd’s tenure when he hired Randall Mott to come in as chief information officer and design a single integrated platform capable of tracking every production run, vendor purchase and sale at the company. Mott, a customer of Hurd’s when Hurd ran Teradata, had put in 22 years at
Wal-Mart
, where he oversaw an enormous network for tracking and forecasting inventory and sales. He had moved to
Dell
in 2000 and consolidated a hundred disjointed computer systems into a single, companywide database.

Now Hurd wanted Mott to do the same for HP–but while using only HP boxes and HP software. “We had as many as ten applications doing more or less the same thing,” Mott says. HP had 85 data centers, burning valuable real estate and electricity, and 7,000 software applications on 784 different databases. “Mark wanted me to build a showcase.”

Today Mott’s system tracks what HP employees, plus 100,000 suppliers and partners, are doing at any particular time. It can be accessed by 50,000 people inside HP. By the end of next year it will run in just six data centers, letting HP shutter 79 other sites. It will use only 1,500 applications. The data centers run with minimal staffing, thanks to HP management software and racks of power-efficient HP servers, built on the cheap.

HP is halfway through a program to chop the outlays for data processing in half, from 4% to 2% of revenues. What doesn’t go straight to the bottom line goes to things like building up the sales staff. (Even $2 million, Hurd says, “is 20 to 23 people on the street for us in China or eastern Europe.”) Plus, with one crow’s-nest view, giant HP now can squeeze suppliers that had charged different prices to different divisions, extracting even more savings. By this November Hurd will have rotated a thousand HP consultants through the new data centers, educating them in how to sell “spend to save” projects to big accounts.

Hurd’s first target is the world’s 2,000 biggest companies, which HP woos with such partners as SAP,
Oracle
and
Microsoft
. Each upgrade could bring in $5 million or more in sales of hardware, software and consulting. That suggests a potential $10 billion if HP could land all 2,000 (an unlikely shutout).

“The business used to be about outsourcing things,” says Livermore. “Now it’s about automating things. We’re not at the top of people’s minds yet, but we will be the company that sets that agenda.”

IBM would like a word on that. “HP is trying to become like us, but they are fundamentally a printer and PC company,” says Robert Samson, a sales vice president in IBM’s corporate hardware group. (IBM relies on services for 53% of revenue, HP for 17%.) “HP has launched a specific attack on our mainframes, but they are not really an enterprise player. They are selling commodity components. We aren’t arrogant about this, but we have immense capability,” Samson says.

“Great managers, tough guys,” Coach Hurd says of IBM, resorting to the make-nice platitudes of a coach whose team is about to play in the Super Bowl. “They don’t do stupid things, and they know what they are doing.”

Korea’s Samsung Life Insurance, with $100 billion in assets, has spent $23 million on an HP upgrade and claims it will recoup that and save an additional $20 million over four years.
Sabre Holdings
‘ hotel reservations arm, likewise, has cut operating costs by 50% by upgrading to embrace newer computer languages such as Java and run on open-source software. HPs services division deploys 69,000 consultants and programmers worldwide.

At times the HP pitch requires a personal touch, and Hurd eagerly provides it.
Comcast
, the nation’s largest cable system operator, had been eyeing a multimillion-dollar data center deal with HP last fall. David Booth, an HP senior vice president selling servers, storage and software, hosted his Comcast clients for dinner one evening at Pasión, a restaurant in Philadelphia, where Comcast is based. The Comcast execs wanted assurance that Hurd would get involved in their deal. “I told them we could get Mark to talk and called him on the way to the washroom to see about a meeting,” Booth says. “Mark told me to hand the phone over to the Comcast guys. The intensity is unique.” The deal closed weeks later.

Beyond the behemoths, 10,000 midsize firms, Hurd says, could be pursued with easy-to-install systems sold via resellers and the Web. Currenex is a California currency trading house that counts on making trades in less than 4 milliseconds; it buys new musclebound computers every four months. It has switched from proprietary
Sun Microsystems
computers that cost up to $150,000 and require special raised floors to HP machines costing up to $20,000 and running open-source Linux software, which it buys over the Internet. For thousands of these smaller companies Hurd plans to certify resellers much the way Mercedes-Benz certifies mechanics.

Elsewhere Hurd sees new growth opportunities in printing, HP’s most profitable arm. The business is moving into copiers and industrial printing of billboards and annual reports, plus online photo storage. Selling such massive amounts of storage, even if it is just for family snaps, has HP’s techies eyeing entirely new markets. “This is servers and storage,” says Chief Technology and Strategy Officer Shane Robison. “What is
Google
but servers and storage? Once we deliver on our core businesses, we have to grow.”

Hurd says HP could end up competing head to head with Google, which plans to offer applications software over the Internet and could move into corporate videoconferencing via its recent YouTube acquisition. HP’s printer division recently began a remote-conferencing and document-sharing service called Halo, which has 15 corporate customers. It could make use of powerful video technology from Voodoo, a small PC games designer that Hurd acquired November 2006, to improve its video offerings.

“We are already a service provider [to businesses with Halo],” Hurd says. “Why not consumers?”

Such ambitions were sidelined when HP’s spying scandal broke last fall. Hurd’s turnaround was just emerging: In early June 2006, at the end of his first full year at HP, he had unveiled 12-month revenues of $89 billion, up 7% from 2005. Last August he reported fiscal third-quarter results, with sales up 5% and profit, before interest and taxes, up 40% to $1.7 billion.

But HP drew headlines, instead, for news of the covert operation led by the HP board’s chairman, Patricia Dunn. She had hired private investigators who may have used pretexting and other means to manipulate their way into the phone records and garbage bins of board members, employees and journalists. In the fallout three board members resigned (including Dunn, who faces state criminal charges), as did general counsel Ann Baskins. An outside investigator, Bryan Wagner, pleaded guilty to federal identity theft and conspiracy charges in January.

“It worried me,” Hurd says in his trademark understated style. “But then, everything worries me. That’s what I’m paid for.” He laments “unacceptable leaks from our board” and “a sloppy investigation.” On Sept. 28, 2006 he testified about the scandal to a congressional subcommittee, taking responsibility and emerging unscathed. In a video message to all of HP later that day he urged everyone to focus on selling, and he got back on the phone.

Hurd reacted to the crisis the way he reacts to most things: by searching for clear answers. When HP’s legal staff and its outside lawyers at Wilson Sonsini did not satisfy Hurd’s desire for details, Hurd hired his own fact finders from law firm Morgan Lewis and had them report directly to him. Three weeks after Hurd charmed Capitol Hill, new numbers showed that, for the first time in several years, HP had toppled Dell as the world’s biggest seller of PCs. But will investors take notice? Maybe not: The Democratic Congress continues to investigate, the Securities & Exchange Commission has been asked to look into Hurd’s exercise of stock options a month before the story broke and a class action is under way in federal court. Hurd frets: “I don’t know that it will ever be over.” A few more terrific quarters would help put the saga behind him, though.